Oil and gas tax flap looks bad for industry, even if it’s not

Some oil and gas operators in Colorado are retroactively claiming millions in tax deductions made possible by a recent state Supreme Court ruling.

That certainly doesn’t do much for the industry’s image in a state where there’s already hostility toward the hydraulic fracturing being used to extract natural gas and some oil in northern and western Colorado.

When I first heard about the tax deductions, while covering the 2016 legislative session, it seemed like the kind of tax avoidance that makes my blood boil. Couple the deductions with low oil and gas prices, a reduction in operations, and a credit on property taxes and the industry paid only $18.9 million in severance tax in 2015-16 — a 93.3 percent decline.

But that $262.4 million in lost revenue is not as nefarious as it seems.

It takes something like a Ph.D. in rocket science to understand how Colorado levies severance tax on oil and gas production, so forgive me if this is unclear.

The sheer complexity is also probably why state officials so grossly overestimated the impact of BP America vs. Colorado Department of Revenue.

The state guessed the ruling would cost $100 million.

It turned out to be closer to $18 million in the 2015-16 fiscal year, and for prior tax years (from 2012 to 2014) the amount is estimated to be between $20 million and $40 million.

Severance tax is levied at the point the natural resource is “severed” from the land. In this case, it’s at the moment oil or natural gas reaches the surface.

Complicating matters, the tax isn’t levied on the quantity of product extracted, but what the product is worth. For some companies this is easy to determine. They sell the product immediately to a third-party operator. Voilà: value.

But for a few large companies that own the pipelines and the processing plants and then sell a highly refined product, it’s much more difficult to determine what the product was worth when it first came out of the ground.

The state has always allowed the operators to deduct from the final sale price of the product “any transportation, manufacturing and processing costs.” The BP ruling also allows them to deduct their profits, called the “cost of capital,” from those three categories.

Let’s give BP the benefit of the doubt that they and the Supreme Court justices are right. After all, if a company can’t make a profit, why would they invest in pipelines and processing plants?

But now that the new deductions exist, it’s opened up a can of worms for lawmakers to revisit the overall tax burden on operators and question whether they are paying “enough.”

Also in that can are tax credits awaiting scrutiny.

A majority of what a company pays in local property taxes can be deducted as a state tax credit to reduce severance taxes. It’s important to note the industry pays property taxes on more of their property value — much more — than anyone else in Colorado. In 2015 operators paid more than $403 million in Weld County.

So what is the appropriate tax burden for an industry that is a huge driver of our economy, produces a resource we rely upon for energy, but also relies on a finite resource that disproportionately impacts our infrastructure and environment?

Arguably, it’s one that is high enough to offset the impacts, but one that is low enough to encourage investment in a risky and expensive venture in our state.

Perhaps in retrospect, given the kerfuffle a couple million dollars in extra deductions caused, the industry would be wise to reconsider nickel and diming the state — even when they are right — and consider their big-picture tax burden.

Because now I’m sure the public and lawmakers are going to be taking a closer look, too.